Futures Spread Ratios

Futures Spread Ratios

It is that time of year when I update many studies and a lot of the data I use to keep a pulse on the futures products that I trade. Yesterday, in an impromptu chat, a follower asked me how many Mini Russell 2000 (TF on ICE) contracts I trade relative to the Mini S&P 500 (ES on CME). To answer that question, I would have to refer to my Index & Bond Contract Spread Ratios spreadsheet.

Here it is:

Note that this chart has been updated since initial posting:

 

This spreadsheet shows the contract ratios of select correlated products while accounting for the following parameters:

  1. 20-day average volatility and range,
  2. dynamic currency conversion to US Dollars,
  3. contract multiplier

So how do you use this?

If you want to find out how many YM contracts one should trade per ES, then you would find the ES row and follow it to the right until you reach the column for the YM. In this chart, you would get 1.185 as a result. Hence, the YM OVER ES spread would be 1.185 YM per ES contract.

Why does this matter?

This chart can be used in several ways:

  1. If you are trying to hedge a position in one product, then you can do so by putting on a position in another product in the opposite direction. The chart tells you what quantity of that hedge position you should put on (this is what I use it for mostly especially if my traders or I get stuck in a Eurex product)
  2. If you are trading one product but are interested in exploring another product and want to know how to size your position, then this chart will help you put on a position size that keeps your loss per trade constant (my secondary use for this chart but equally as important)
  3. If you want to determine what the cost of a product will be in the form of margin required and potential return versus a product that you are trading now. This helps you determine the most efficient use of your capital for the return expected. For example, CME exchange margin for the ES is $5,625 per contract. The TF contract margin is $4,500 per contract per The ICE Exchange (I am not talking about broker margin). Since it takes 1.7 ES contracts per TF contract, then it would require $7,650 in margin to hold one TF contract. Therefore, it is more efficient to trade the TF than the ES in this case. In other words, it would cost less and you can make more money trading the TF rather than the ES given the spread ratio

NOTE:

These spread ratios ARE DYNAMIC. They change over time and on a daily basis. They may not change enough to adjust the number of contracts required to hedge a position, but they do change quite a bit over time. For example, the YM/FDAX hedge ratio was 3.5 contracts and is now almost 5 contracts. You cannot use this chart indefinitely and it is continuously updated through dynamic links created in Excel.

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